Regal Entertainment Group F3Q08 (Qtr End 09/25/08) Earnings Call Transcript

Oct.23.08 | About: Regal Entertainment (RGC)

Regal Entertainment Group (NYSE:RGC)

F3Q08 Earnings Call

October 23, 2008 9:30 am ET

Executives

Michael L. Campbell - Chairman, CEO

Amy E. Miles - Chief Financial Officer, Executive Vice President, Treasurer

Donald De Laria - Vice President Investor Relations

Analysts

Jake Hindelong - Monness Crespi Hardt & Co.

Lloyd Walmsley - Thomas Weisel Partners

Barton Crockett - J.P. Morgan

Anthony DiClemente – Barclay’s Capitol

Hunter R. DuBose - Morgan Stanley

James Marsh – Piper Jaffray

Jeffrey Logsdon – BMO Capital Markets

Operator

Good morning. My name is Jen and I will be your conference facilitator today. At this time I would like to welcome everyone to the Regal Entertainment Group third quarter 2008 earnings release conference call. With us is our host is Mike Campbell, Chief Executive Officer of Regal Entertainment and Amy Miles, Chief Financial Officer of the Regal Entertainment Group. (Operator Instructions)

I would now like to turn the call over to Don DeLaria, Vice President of Investor Relations.

Donald De Laria

Hi and good morning. Before I begin today I’d like to remind our listeners that this conference call contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical facts communicated during this conference call may constitute forward-looking statements. These forward-looking statements involve risks and uncertainties. Important factors that can cause actual results to differ materially from the company’s expectations are disclosed in the risk factors contained in the company’s annual report on Form 10-K dated February 26, 2008. All forward-looking statements are expressly qualified in their entirety by such factors.

Now I’ll turn the call over to Mike Campbell.

Michael L. Campbell

Thanks Don and welcome and thank all of you for dialing into our third quarter conference call. Today I will provide an overview of the industry’s and Regal’s third quarter results, a review of current trends in the exhibition industry including some of our expectations regarding box office trends for the holiday films, and provide an update regarding the digital cinema roll out. Following my remarks Amy Mils will provide a summary review of our financial results and as always we will conclude the call with a question and answer session.

Now turning to third quarter industry results, we were pleased with the third quarter industry box office driven primarily by the success of Batman The Dark Knight, Hancock, and Mamma Mia. The Dark Knight set a number of all time box office records, including the highest grossing midnight release with a record box office take for that show of $18.5 million beating Star Wars Episode III which took in just under $17 million. Also the highest grossing one day and weekly total with a box office gross of $68 million during its first day of release and a record $158 million in box office receipts for the opening weekend. The Dark Knight has currently generated just under $527 million in domestic box office which translates to the second highest domestic gross of all time.

As far as the 2008 fiscal year, The Dark Knight currently tops the next highest grossing picture of the year by a margin of over $200 million, $527 million versus $318 million for Iron Man. We are encouraged that The Dark Knight helped the third quarter box office increase 12% over the third quarter of 2006 and also compared well against a record third quarter last year which was up 15% over the prior year.

We were also encouraged with the overall success of the box office during these challenging economic times. The year-to-date box office numbers support our belief that we are primarily a product driven industry.

For the period that corresponds to Regal’s fiscal third quarter, industry sources report a decrease in aggregate box office revenues of approximately 3%. When taken together with an estimated 1% increase in the total number of screens, industry box office per screen decreased approximately 4%. The recent acquisition of Consolidated Theaters clearly benefited our reported box office revenue as we were essentially flat with last year during a period of declining box office revenues for the industry.

On a per screen basis, our box office revenues were down approximately 6%, resulting in part from our 140 basis point outperformance on the top films last year which created a much more difficult comparison for Regal and the current period. As we have discussed on previous calls, Regal outperformed the industry box office in the 2007 fiscal year.

Now turning to third quarter highlights, I’d like to address a few key third quarter highlights that demonstrate our continued commitment to efficient theater operations. During the quarter we benefited from a recently acquired consolidated theater circuit which generated cash flows that were slightly ahead of our expectations.

Also on October 1, digital cinema implantation partners or DCIP announced an agreement with five studios on the digital cinema upgrade, and in a challenging quarter for the box office we continue to focus our attention on pricing opportunities and cost control and we’re pleased with the following quarterly comparisons. Admission revenue per patron increased 3.9%. Concession revenue per patron increased 3% which reversed the slight decline in the second quarter which was down just over [blank audio 6 seconds] 1%. Our film rent and advertising expense increased only 40 basis points to 54.6% despite the upward pressure on this line item due to the phenomenal success of The Dark Knight.

Other operating expenses per screen increased only 70 basis points on a per screen basis due to our continued focus on cost control. Our G&A expense remained flat despite the addition of over 400 screens from Consolidated. We’re also pleased to announce another quarterly dividend of $0.30 per share and Regal’s dividend policy is key to our overall strategy of maximizing shareholder return and based on yesterday’s closing price currently yields 9%. Including the dividend announced today, we have generated dividends of $18.46 since our initial public offering which was priced at $19.00 in May of 2002.

Now turning briefly to our expectations for the fourth quarter, we are encouraged by a strong start to the fourth quarter box office and we are optimistic about the film slate for the balance of the quarter. For the period that corresponds to our fiscal fourth quarter to date, industry sources indicate the box office is up approximately 13% versus last year. As for the balance of the fourth quarter, on Friday this week we open Disney’s High School Musical 3 and Lions Gate’s Saw V. On November 7 we open Dreamworks’ Madagascar: Escape 2 Africa and also Sony’s Quantum of Solace, Nathaniel Craig reprising his role as James Bond. On November 21 we will open the next big 3-D animated film from Disney called Bolt featuring the voices of John Travolta and Miley Cyrus, followed by Warner Brothers’ Four Christmases starring Vince Vaughn and Reese Witherspoon, and 20th Century Fox’s Australia starring Hugh Jackman and Nicole Kidman.

On December 12 we will introduce Fox’s The Day The Earth Stood Still with John O’Reeves followed by the Warner Brothers film Yes Man starring Jim Carrey. On December 25 we will open the Paramount Film The Curious Case of Benjamin Button starting Brad Pitt as well as Disney’s Bedtime Story starring Adam Sandler and then on the 26th of December the MGM film Valkyrie starring Tom Cruise. As a reminder, Regal will also benefit this year from a 53rd accounting week which contributed an additional 10.2 million attendees and approximately $40 million of adjusted EBITDA the last time it occurred in 2003.

Now looking a bit ahead to the 2009 film slate, it’s still a little early but we’re pleased to hear that a number of [temp hole] titles have been scheduled for 2009 including the following: Monsters vs. Aliens from DreamWorks, and this one’s in 3-D; X-Men Origins: Wolverine; Angels and Demons with Tom Hanks which is a follow up to The DaVinci Code; Night At The Museum 2; Terminator: Salvation; Transformers 2: Revenge of The Fallen; Ice Age: Dawn of the Dinosaurs; Harry Potter and The Half Blood Prince, which was moved from our fourth quarter this year into next year; Avatar, which is a live action film by James Cameron in 3-D; a film called Up, which is also in 3-D; the Jonas Brothers 3-D concert movie; and lastly the Hannah Montana: The Movie. Based on these titles we believe the 2009 film slate is shaping up very nicely.

Now for a quick update on DCIP, last quarter we announced that Digital Cinema Implementation Partners or DCIP had signed the first digital deployment agreement with a major studio. We’re very pleased with the significant progress made by DCIP since our last call, particularly regarding the status of the studio agreements. As you are aware, in early October DCIP announced that it had signed long term digital deployment agreements with Twentieth Century Fox, Walt Disney Motion Pictures, Paramount Pictures, Universal Studios, and Lions Gate Films. DCIP is currently in discussion with the last two major studios, Sony and Warner Brothers regarding digital deployment agreements.

With respect to the financing aspect of the digital conversion, obviously the turmoil in the credit markets has clearly impacted the availability of capital for everyone and we cannot predict when the credit markets will ease and as a result we do not have an update to the expected time line. As we previously indicated, though, JP Morgan has worked with DCIP throughout this process to structure a deal that would work from a financing perspective and we continue to believe that the early involvement of JP Morgan will be beneficial to the overall financing once DCIP is in a position to launch a deal. As a company we have spent a lot of time finalizing our internal digital roll out plan and we are ready to launch the conversion as soon as all the necessary agreements and financing deals are finalized.

I’d also like to talk about the premium movie going opportunities that we see going forward. A key element to Regal’s strategy in the next several years will be to provide enhanced theater going experiences which of course includes 3-D but also includes an expanded base of IMAX theaters. We’re also optimistic regarding the potential for special events like the Hannah Montana/Miley Cyrus concert film last year and the Jonas Brothers concert film in early 2009 and other alternative content opportunities. As of today there are a total of 40 3-D films announced for release over the next several years and we are pleased with the studios’ commitment to this premium content which also allows us to price at a premium compared to our existing 2-D ticket prices.

As we’ve indicated previously, we are excited about the conversion to digital projection because of the incremental margin opportunities provided by 3-D and alternative content. With that in mind, our internal digital roll out plan includes a strategy for maximizing the number of deployed 3-D systems as soon as we start the conversion process.

Now briefly turning to IMAX, this month we are installing our first digital IMAX systems as part of an expanded IMAX relationship. As we announced previously, we expect to increase our number of IMAX screens from 18 presently to a total of 52 by the end of 2010. IMAX’s new joint venture model is attractive to exhibitors and as a result has encouraged studios to produce more blockbuster films in the IMAX format.

Then finally with respect to Regal’s dividend strategy, I want to remind investors of a few key points. While the quarterly dividend is always at the discretion of the Board of Directors, we would like to point out that number one, we have maintained the dividend at the existing level through box office ups and downs since its inception during fiscal 2004. We do have adequate cash reserves to fund the dividend even in a down box office environment over the medium term and lastly we are optimistic about the prospects for incremental cash flows and future years from premium movie going opportunities including 3-D, IMAX, and alternative content.

As we’ve said before, Regal does not target a particular payout ratio or have a cash balance figure which would cause material changes to our dividend strategy. While dividends are never guaranteed, returning shareholder value in the form of dividends remains a key part of our business strategy. So in summary we’re pleased with the fiscal year-to-date box office in an otherwise challenging economic environment. The theater business continues to be product driven and we’re encouraged by the relatively solid performance at the box office year-to-date and we will continue to focus on efficiently operating the core business while looking forward to continued box office success during the holiday season.

I’d now like to turn the presentation over to Amy Miles, our CFO, to discuss our performance financially.

Amy E. Miles

Thanks Mike and good morning. Today I would like to provide additional detail on Regal’s third quarter fiscal results as well as provide an update with respect to our balance sheet and CapEx. Regal Entertainment Group reported total revenues of $757.6 million consisting of $516.8 million from box office revenue, $209.6 million from concession revenue, and $31.2 million of other operating revenues.

Our admission revenue this quarter increased approximately 0.2, primarily as a result of a 3.5% decline in attendance, offset by a 3.9% increase in our average admission per patron. The incremental screens acquired from Consolidated in April obviously generated the slight increase in our third quarter admissions revenue.

Concessions revenue this quarter decreased 0.6% as a result of the previously mentioned decline in attendance, somewhat offset by a 3% increase in our concession per cap for the quarter. The increase in our concession per cap was driven primarily by price increases taken during the quarter coupled with some concessions friendly films. We were particularly pleased with the increases in both our average ticket price and our concession per cap given the current economic environment.

We were also pleased to report that other revenues for the third fiscal quarter of 2008 increased $5 million or approximately 19% over the comparable quarter of 2007. This increase was driven primarily by increases in the net revenues related to NCM. Those went from 41.8 million in the third quarter of ’07 to $3.5 million in the third quarter of ’08 and we also had improvements in both vendor marketing revenue and other theater revenue for the quarter.

Now looking recently at our [inaudible] items for the quarter, film and advertising expense as a percentage of box office for the current quarter represented 54.6% of our admissions revenue. Film rental and advertising expense increased by 40 basis points over the prior comparable quarter primarily as a result of the success of The Dark Knight and higher film rental associated with the top grossing picture. For this quarter the top three pictures represented 37.5% of our box office revenue, as compared to 31.4% for the top three pictures in the third quarter of 2007.

Our concession margin decreased 61 basis points over the comparable period in 2007 and this produced a margin of 85.5%. As in the first two quarters, slightly higher food and beverage costs will partly offset by benefit of our new beverage agreement. While the total vendor marketing funds included in our financials for the quarter increased over 6% from Q3 of 2007, the portion that is recorded as a reduction of cost of concessions is slightly lower as compared to the first two quarters of this year due to a high percentage of our attendance that was generated during peak advertising weeks during the quarter.

In the aggregate, the impact on EBITDA is in line with our Q1 and Q2 period. Total rent expense for the quarter increased $8.5 million or 9.9% due primarily to the acquisition of 400 screens from Consolidated and to a lesser extent our new built screens replacing the existing older screens. Our other operating expenses increased approximately $13 million or 7.3% for the quarter but were up less than 1% on a per average screen basis due primarily to our focus on the costs that we can control in that area.

Also please note that G&A expense includes approximately $1.4 million of share based compensation expense for the third quarter. To exclude the share based compensation expense all other G&A line items were flat with Q3 of 2007. Our third quarter total revenue of $757.6 million was slightly ahead of consensus street estimates. The third quarter also produced adjusted EBITDA of $146.9 million versus $167.7 million for the same quarter last year. We believe that the $146.9 million was slightly below consensus street estimates due to higher film cost associated with The Dark Knight and also the first full quarter impact of Consolidated acquisition on our expense line items. Our adjusted EBITDA margin of 19.4% reflects our continued focus on cost control and we were pleased with the quarterly results during a period of difficult box office comparison.

Now looking briefly at our asset base and our balance sheet, we ended the quarter with approximately $113 million in cash and a total debt balance of approximately $2 billion. As a reminder our third quarter is often our low point in our cash balance and we would expect to build cash in the fourth quarter as we have in prior years.

Also today given the status of the credit market, we thought it might be helpful to review our debt levels. I’ll provide some brief comments on the maturities and our covenant levels as well as our exposure to fluctuation in LIBOR rate and certain banks or investment banks that may affect availability under our revolving credit agreement and/or our interest rate swap agreements.

At the end of our third quarter our outstanding bank debt totaled about $2 billion. We amortized our bank debt at a rate of 1.6 per year and the remainder of that balance is due in equal installments in June and October of 2013. In addition, our revolving credit agreement extends through October 2011. Our $211 million of converts matures on March 11 in 2011 and all remaining debt is due 2012 or later.

With respect to our leverage ratio, it’s currently approximately 3 times on a 3.7 time covenant level and just a reminder when you’re thinking about Regal’s covenant level, our convertible notes are outside the covenant calculation so they’re excluded from that calculation. The covenants are calculated on a net debt basis so you do count the cash as a reduction. The covenants are subject to future step downs.

I’ll turn briefly to LIBOR and swap exposure. We have out of our total $1.6 billion of bank debt of which approximately $700 million is fixed at various rates through interest rate swap agreements and the remaining portion of the debt is floating rate debt at LIBOR and that’s [puzzling] 50 or 175 depending on Regal’s consolidated net leverage. We will continue to monitor our level of fixed versus variable rate debt mix over the next couple of quarters.

With respect to Regal’s specific exposure to Lehman, we currently have $95 million of maximum availability under our revolving credit facility which is down $5 million due to the failure of Lehman Brothers. In addition, we did have a $100 million out of the money swap with Lehman which was not included in the $700 million we previously mentioned. We are in the process of finalizing the termination of the $100 million swap and our comfortable with our counter-party risk for the remaining $700 million of outstanding swap.

Now looking briefly at our CapEx for the quarter, during the quarter total CapEx was $28.5 million and that was partially offset by $0.3 million of asset [inaudible]. During the third fiscal quarter 2008 we opened two theaters with 24 screens and closed two theaters with 18 screens bringing our totals to 551 theaters and 6,782 screens. Based on our development schedule for the remainder of 2008 we continue to expect CapEx to be in the range of $115 million to $130 million and that’s exclusive of approximately $5 million in asset sales and for the remainder of the year we would expect to open four theaters with 61 screens, close three to four theaters with 40 to 55 screens, and that would have us ending the year with approximately 551 theaters and 6,795 screens.

In summary, as Mike previously stated, we’re optimistic regarding the [blank audio] films for the remainder of 2008 and look forward to the 2009 fiscal year.

That concludes our remarks and we would now like to answer any questions you guys have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jake Hindelong with Monness Crespi Hardt.

Jake Hindelong - Monness Crespi Hardt & Co.

First on 2009, could you speak a little bit to the cut back in the size of the film fleet by Warner and Paramount?

Michael L. Campbell

Regarding those cut backs, we’ve said this a number of times in the past and over the years, modest cut backs from studio by studio basis really have never translated into any type of reduction or increase in the box office. I think it’s more of a quality issue rather than quantity within let’s say a 5% to 10% range and then secondly there’s always been a history of other entities jumping in and filling those voids in film production if one studio cuts back, there are always other studios or other entities that jump into that void so we’re not terribly concerned about these year to year announcements, up and down in production slates.

Jake Hindelong - Monness Crespi Hardt & Co.

On the first quarter could you just speak specifically to the 52-53 weekend and how that will affect results versus last year?

Amy E. Miles

I think when you’re thinking about the 53rd week that we’ll have this year, obviously the quarter that you will see the most significant impact in 2009 will be the first quarter. You can think about that. You’ll be replacing that last week which is that last Christmas week with a week at the end of March, so that’s the flip that you’re gearing there. I think if you would go back and look at our attendance difference during that time period, and this is just using a historical average, obviously it can vary based on actual attendance next year, but you could think that of that 10 million attendees that you would have the benefit of in the fourth quarter, you would get back, I would range it at 5 million to 6 million of those in the first quarter of next year.

Jake Hindelong - Monness Crespi Hardt & Co.

So that would give you more of the impact from Monsters vs. Aliens on the first quarter, correct?

Amy E. Miles

Yes.

Jake Hindelong - Monness Crespi Hardt & Co.

As far as IMAX is concerned, what pace of roll out do you expect for ’09? Would it be fair to assume that half of the digital screens get rolled out?

Michael L. Campbell

I think it may be a bit longer in term over that. IMAX is just now beginning to get up and go with their digital systems and clearly we will go with the pace that we can but there is some conversion time required within the theaters. The auditoriums have to be closed for a period of time to convert, so there will probably be a three year time period for those additional 30 or so complexes.

Operator

Your next question comes from Lloyd Walmsley with Thomas Weisel Partners.

Lloyd Walmsley - Thomas Weisel Partners

I was wondering if you could just comment about the working capital use in the quarter. It looked a little larger than we expected. Is there anything structural going on between payments to the studios on shorter terms or anything?

Amy E. Miles

Not at all Lloyd. One thing, we try to do this as a reminder, it’s very... there’s a cyclical nature when you’re looking at the timing of these payments on a quarterly basis. On an annual basis that usually smooths itself out. So I think here’s a couple of things. We had a use of working capital of about $74 million in the third quarter of last year, $125 million this year. 100% of that decline is film sales and I think if you look at the second quarter you will see that we had a pick up in working capital of about $25 million. As you look at that same quarter last year, we had a use of capital of $44 million. You can just see a little bit of the variability quarter to quarter and the only thing that we typically see there is changes in our film payables. We would expect by the end of the year that we would all set that and be back to historical levels.

Lloyd Walmsley - Thomas Weisel Partners

As you look out to ’09 on the new build front with the covenants getting stepping down and just given the macroenvironment, would you consider building out new theaters at a slower rate next year? Are there any other things you would consider doing to conserve cash just in this environment?

Michael L. Campbell

Well, I think, Lloyd, that there may be, you know, a phenomenon that is somewhat out of our control anyway, because a lot of the developers that we rely on to build these new shopping center projects are struggling in this economy as well, so we still have commitments for building at roughly the historic rates you’ve seen the last few years, replacement rate. Honestly, at the end of the day I think some of these projects will be delayed and pushed into the future just because of developer issues.

Amy E. Miles

And I’ll add this briefly on with respect to the covenants, that, I would think that we would end the year, let’s call it 2.7 to 2.9 times leverage, or let’s use 2.8 as an average there. And, with the coveted 7 down to 3.5 times for next year, that’s about a, let’s call that a 70 basis kind of range of where we expect to be versus where the covenant is stepping down and you can think about, let’s say, let’s just use the number of $550 million, a round number, every half a turn is $225 million. Hopefully that gives us a little bit of clarity of what to expect with our covenant so we are comfortable from that perspective.

Operator

Your next question comes from Barton Crockett - J.P. Morgan

Barton Crockett - J.P. Morgan

One of the questions I wanted to ask about was in terms of what the DCIP agreement. Can you give us any of what, if any impact it will have on your CapEx or operating expenses next year, as opposed to this year it’s going to be missing, as hoped in the genuine time frame?

Amy E. Miles

I think what you’re looking at; let’s talk about digital and the conversion to digital. We do not believe that we would have a material increase in our CapEx for let’s just say with the 2009 fiscal year, let’s put it by the timing of the roll out because of the credit market issues. I’m answering the question independent of that. We still believe that the subsidy from the studios over the time period is going to find the majority of this conversion and there will not be any material increase in our CapEx over that time period. And we do think that on a going forward basis that any incremental operating expenses will be offset by efficiencies we can have by converting to a less mechanical, less manual process. I think from that perspective we would look at that as a little bit more neutral. I wouldn’t say there would be a benefit from there but we aren’t expecting large increases in cost either.

Operator

Your next question comes from Anthony DiClemente from Barclay’s Capitol.

Anthony DiClemente – Barclay’s Capitol

So question is more, just taking steps back in big picture, there’s an ongoing debate about the theater businesses in this recessionary environment and whether or not the box offices, is counter cyclical or recession resistant. I was wondering if you guys could comment on, if you look back at past recessions, are there any conclusive data that either attendance or admissions revenue are recession proof or counter cyclical or is it really more product driven? Then, obviously the debate involves the price of going to the theater, so it is the cheapest out of home form of entertainment, but as we know going to the movies is not as cheap as it used to be. There’s definitely more substitutes at home, whether it be home video substitutes and then out of home substitutes, so I was just wondering if you could comment more big picture broadly on the business in light of the turmoil we’re going through as an economy. Thank you.

Michael L. Campbell

Well, I think clearly, you know, it would be hard to say that any business is recession proof but I think as far as being recession resistant, our industry is probably as recession resistant based on historical facts as any that I’m aware of. We’ve had growth in the box office in 5 of the last 7 recessionary periods. With that being said, I think it’s always a product driven business. I think that we demonstrated that we can grow in a recession but here again to grow in a recession, you have to have the product and I think that if the product is not there, you can have a great economic environment and still have declines in the box office. We’re confident that we’re going to fare better than most industries and I think most of the statistics available would bear that out. It is clearly more expensive to go to the movies today, but it’s also clear that it’s been the least expensive form of quality home entertainment and it’s also a fact that during recessionary times, particularly when we’ve had a lot of the bad news that we’ve had recently that people need to escape and it’s easy to get to a movie theater and relatively inexpensive to escape from a lot of other things going on around you. As long as the product holds up I think that we’re in a position to tough out any recession that we have.

Anthony DiClemente – Barclay’s Capitol

Is there any change in your strategy as it pertains to admissions pricing versus concession pricing increases going forward given a more sharp recessionary environment? Does that affect the pricing strategy?

Michael L. Campbell

I think it’s always something in the background, Anthony, but at the same time, we mentioned earlier we are able, in the quarter, to have some meaningful increases in average ticket price as well as average concession sale and part of that was pricing. We do a lot of market research, we do a lot of testing before we roll out some of these increases company wide, so we’re comfortable with any increases that we pass along certainly outweigh any negatives as a result of that.

Operator

Your next question comes from Hunter DuBose from Morgan Stanley.

Hunter R. DuBose - Morgan Stanley

My first one is, Amy, could I get you to quickly define how EBITDA is put together for your covenant calculations? Is it a trailing or a forward number and what exactly is included in the EBITDA number?

Amy E. Miles

It’s a trailing number; there are different definitions of EBITDA as compared to how we report. The thing that’s different there, it’s probably on an annual basis. You have anywhere from $7 million to $10 million of non cash out of primarily rent. When we report our adjusted EBITDA we don’t include that add back so that’s in addition to our reported EBITDA, that’s the main adjustment. Let’s take for example, Consolidated. You would perform a Consolidated for a full year since you’ve spent the cash and the trailing calculation. So it’s trailing 12 with a few additional non cash add backs that I would ballpark at $7 million to $10 million a year and you would pro forma a full year of acquisitions.

Hunter R. DuBose - Morgan Stanley

And is income from MCN included in there in terms of your global end dividend payments from them?

Amy E. Miles

Yes it is.

Hunter R. DuBose - Morgan Stanley

It is, ok. Great, and my next question is, I didn’t quite follow your prepared remarks regarding the concessions gross margins, but if I look at the performance of the quarter, it seems as though there was a reversal in the recent trend of improving margins, and I was just wondering if you could clarify or recap what the end of the line drivers were there?

Amy E. Miles

Yes, I think you had to look at it, if you look at our other revenue line, you will see growth in that line item of about $5 million for the quarter. And then when you look at our concession margin, we did have a 60 basis point decrease but what we were trying to clarify there is, in this quarter we have had a lower reclass as part of our Denver marketing revenues from revenue into concession cost. How that calculated is, accounting rules dictate that you have to measure the fair market value, the advertising, and the other, which is primarily advertising that the vendors receive as part of their payment to the company. Depending on that fair market value calculation you’ll have a higher or lower reclass and that was based on attendance the number of attendees in peak periods and that impacts that reclass number. All we were trying to make a point of, if you consider the gross in that line item, and the increase in the concession and you net them, you’d be on the same basis of Q1 and Q2 adjusted EBITDA line.

Hunter R. DuBose - Morgan Stanley

I see, and what guidance can you give us regarding expectations for gross margins on concessions going forward?

Amy E. Miles

I think if you look at where we’ve been quarter to date and where we’ll end the fourth quarter if you use that next year that should be in line. There may be a slight increase on there but I wouldn’t expect it to be materially different.

Hunter R. DuBose - Morgan Stanley

Okay, great, and my final question is, if it’s possible that new screen openings might be delayed next year because the underlying facility or mall is not yet built, do you guys have the flexibility to slow down the closing of existing screens or is it possible that this may result in a net decrease in your overall number of screens that you’re in next year?

Michael L. Campbell

Most of the closures we have are totally voluntary. We just make decisions on whether to renew leases or not and very few of those would be outside of our discretion.

Amy E. Miles

To my point there too, often what we do is we’re building a new theater to market and we’re closing an older theater in the market so we can time the opening and closing.

Hunter R. DuBose - Morgan Stanley

But just to clarify, if shopping mall facilities are being delayed by say a year or two because of the current economic environment but renewing a lease on an existing screen which commits you to say another five years or so which as I understand it is how these contracts typically work, how would you think about making that decision in terms of holding over an existing screen for another 5 years versus just waiting for another 12 months or 18 months for a new screen to open up?

Michael L. Campbell

I think a lot of times Hunter, you’re correct, I think fundamentally most leases have renewal options with five year increments, but the reality is once you get to the end of a 15 or 20 year lease, we’ve had very few circumstances where we couldn’t go to a landlord and say, “Look, we want to do a month to month or a one or two year renewal.” Generally they’re flexible because we are dealing with an older building and the loss of a tenant is not a good thing for them typically so we find that they’re pretty flexible.

Operator

Your next question comes from James Marsh with Piper Jaffray.

James Marsh – Piper Jaffray

Two quick questions here. The first is related to DCIP and obviously I understand that the credit markets are closed here, but I just wanted to get a sense for your level of patience with waiting for the credit markets to open. How long would you wait and I guess related to that, what other options if any are you exploring if the credit market doesn’t open?

Amy E. Miles

I think with respect to that you always want to be a little optimistic about that timing but I think the way that we view what that timing is from Regal’s perspective, we’re going to be in this business for a long time. So as it relates to when digital can start versus when the credit markets open, in our mind, I don’t think we’re sitting here thinking this is years away from that perspective. I think we’d have the patience to wait on the credit markets, and I’m sorry, I think you also asked a second question.

James Marsh – Piper Jaffray

It was related to that, if you weren’t going to be patient what other options would you explore, but it sounds like you’re going to be patient.

Amy E. Miles

Yes, I think any other option that you were to explore is always going to require some access to the credit market by someone so I think from that perspective you’re going to be somewhat limited because all options are going to be some type of financing.

James Marsh – Piper Jaffray

My follow up question relates to [Reel-D] and I know there’s an agreement to roll out their for 3-D solutions but I was wondering if you’ve evaluated some of the others like Dolby or [inaudible] and if you could just explain to us how you’re kind of evaluating those different options, maybe the pros and cons, etc.

Michael L. Campbell

We have indeed evaluated all the options out there and we believe at this point in time that [Reel-D] has the best solution for us, the best technology. The deal structure we have with them we’re comfortable with going forward. That’s not to say at some point in the future we would reconsider that. We could reconsider that but I think during the early roll out phases of 3-D we’re very comfortable with [Reel-D] as I believe the studios are, and everybody’s solution works but overall we like the components of the [Reel-D] solution.

Operator

Your next question comes from Jeff Logsdon with BMO Capital.

Jeffrey Logsdon – BMO Capital Markets

First question, are you primarily or practically finished now with any of the theater disposals that you had to go through via the Consolidated Theater acquisition?

Amy E. Miles

Three of the four we are complete as of today so we still have one remaining theater.

Jeffrey Logsdon – BMO Capital Markets

Is there a time frame related to that? Is there an option of pushing that out or is it generally we just shouldn’t even think about it as an issue?

Amy E. Miles

I think that this one theater you shouldn’t think about it as an issue, but you do typically work with the DOJ in finalizing that time period.

Jeffrey Logsdon – BMO Capital Markets

Relative to DCIP as it relates to 3-D screens, with the [Reel-D] solution you need to have a silver screen to project onto. Is that part of the cost basis of DCIP? Is that a cost that you’re going to undertake yourself, and if I’m not mistaken, is that like a $4,000 to $6,000 expense item per screen?

Amy E. Miles

You’re correct on the amount and you can think that would be a cost outside of DCIP and a cost of 3-D that the exhibitors will bear. Remember for a lot of your new theaters when you’re putting in 3-D, you just install silver screens which we’ve done and we have this year gone ahead and installed ahead of schedule more silver screens so that we would be ready for the 3-D roll out, but yes, going forward, that will be a cost that we bear. We just think we can not increase our total CapEx and absorb that as part of our... We always say it takes $120 million to $135 million to run the business from a CapEx perspective. We can absorb that cost in that number.

Jeffrey Logsdon – BMO Capital Markets

One other question related to calculations of your covenants, do you not also add back impairment charges, non-cash compensation expense, asset sales, cash generation, etc.?

Amy E. Miles

I was just trying to point out that you don’t see in our adjusted EBITDA that we report but yes you’re exactly correct. Any non-cash is added back. It’s just our adjusted EBITDA already includes those add backs in the numbers we report, so in addition to the numbers we report, you also get an add back for non-cash rent.

Operator

Ladies and gentlemen, we have now reached the allotted time for questions. I would like to turn the conference back to Mike Campbell for closing remarks.

Michael L. Campbell

Thank you everybody for dialing in and we appreciate your attention and we’ll do this again next quarter. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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